Georgia is Over-banked for a Small Economy, Fitch

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The FINANCIAL — In 2012, Fitch ratings expects the banking system to remain broadly on the same growth trajectory as in 2011, supported by the still expanding economy, and banks’ quite comfortable liquidity positions.


Loans and deposits are likely to both expand by around 20%, which is slightly lower than in 2011, when growth was 24% and 21%, respectively, (and would have been higher still, adjusting for GEL appreciation).


“Our expectation of a moderate slowdown in 2012 reflects greater market saturation and base effects”, James Watson, CFA, Managing Director, Financial Institutions, Fitch Ratings told The FINANCIAL in an exclusive interview.


“Georgia is over-banked for a small economy, with 18 credit institutions currently registered. Put simply, there is just not enough banking business in the country to sustain that many banks. At the same time, most of the country’s lenders have relatively strong foreign owners, and smaller, less profitable institutions are for the most part under limited near-term pressure to deliver improved performance”.


“We view the Georgian banking sector quite favourably for what is still a relatively small emerging market banking system. Overall, the sector is well capitalized and comfortably liquid, pre-impairment performance is strong and asset quality is stable. The banks are benefiting from a growing economy and improvements in political and economic governance. The sector’s main vulnerabilities arise from potential volatility in the performance of the Georgian economy and the high level of foreign currency lending.”


Q. What do you consider to be the main challenges for the banking sector in 2012?


A. Challenges will include, firstly, maintaining loan underwriting standards as credit penetration increases; secondly, attracting further customer deposits to prevent a build up in reliance on wholesale funding as credit portfolios expand; and, thirdly avoiding a sharp contraction of margins and profitability as competition continues to increase.

Q. What are long-term predictions about ratings of Georgian banks?


A. The medium- to long-term direction of Georgian banks’ ratings is highly dependent on the overall economic development of the country, the absence of adverse shocks, whether external or internal, and the sovereign credit profile. A reduction in foreign currency lending risks and continued sound financial metrics in terms of capital, liquidity, performance and asset quality would also be important for banks to attain higher ratings.

Q. What were the main reasons and factors that resulted in improvement of Georgian Banks' rating?


A. The upgrades of Bank of Georgia and TBC reflected their strong performance as they emerged from the crisis, still comfortable capital and liquidity positions and the reduction in Georgian country risks, as reflected in the upgrade of the sovereign to ‘BB-‘/Stable.


The ratings of Procredit Bank Georgia and VTB Bank Georgia are driven by potential support from their parent organizations. The upgrades of these two banks were driven by the reduction in sovereign risks, and hence the more remote probability that Georgia would at some time introduce transfer or convertibility restrictions which could impede the ability of banks to service their debt obligations.


Q. Does strained relation between Georgia and Russia influence on the development of banking sector? Is this additional risk for banking?


A. The strained relations between Georgia and Russia have not had a significant, direct impact in the banking sector, although they increase the risk of adverse shocks which could be negative for both the economy as a whole and the banking system in particular. The negative impact on bank asset quality from restrictions on the import of certain Georgian goods into Russia has been moderate.

Georgian banking sector vs. other emerging markets


A. The sector remains very small, with the lowest asset base of 41 global emerging market banking systems included in our latest comparative study. However, on a relative basis, the sector stands out for its strong capitalization (third highest equity/assets ratio at end-H111 behind Azerbaijan and UAE), high reserve coverage of impaired loans (fourth highest after Colombia, Peru and Taiwan) and strong lending margins (second after Venezuela, where inflation is much higher). Credit penetration is broadly in line with the country’s level of economic development. A key weakness remains the proportion of foreign currency lending (third in our study, behind Latvia and Croatia).

Q. Popularity of GEL in deposits and loans vs. USD is increasing in Georgia. How would you estimate this fact?


A. We view positively the gradual reduction in the proportions of foreign currency lending and deposits. The share of FX deposits fell to 65% at end-2011 from 81% at end-2008, and in absolute terms the increase in local currency deposits during the three years was slightly higher than the volume of new foreign currency deposits. On the asset side of the balance sheet, progress has been more moderate, but the share of FX loans nevertheless fell to 70% at end-2011 from 77% at end-2009. Notwithstanding recent progress, however, the banking system and the broader economy remain highly dollarized, representing a key risk for the sector.


Q. Georgian banks still remain quite cautious about lending for SME and start ups. Please, could you comment on this?


A. As the corporate and retail markets have become more saturated, and competition is starting to push margins down – in particular in the large corporate segment – we see banks focusing more on SME lending. Although Procredit remains the pioneer in this area, all the major banks now have dedicated small business lending programmes. At the same tine, lender caution in extending credit to start ups with sometimes questionable business prospects is inevitable, and is not something specific to Georgia.


Q. How would you evaluate the market for private individuals and corporate customers in the Georgian banking sector?


A. The large corporate segment is relatively small in terms of the number of companies, in particular as a growing number of Georgian corporates can access finance from foreign owners, international financial institutions or other non-Georgian lenders. In 2011 we saw increasing competition for corporate lending business and significant refinancing of loans on other banks’ books at lower rates. The retail market continues to grow rapidly, with lending to households up by 30% in 2011 in GEL terms, notwithstanding the appreciation of the local currency in the first half of the year.


Q. Real GDP growth by 6, 4 percent in 2011. Please, comment on this.


A. In Fitch’s view, GDP is set to continue to grow strongly in 2012-2013, by an average of 5.5%. Exports are diversified by product and by market, affording some resilience to slower global growth. Georgia is investing in infrastructure that will enable it to take full advantage of its role as a transit country for the region. Other growth areas include hydroelectric power and tourism.

Fitch Ratings upgraded Georgia‘s Foreign- and Local-Currency IDRs to ‗BB−‘with a Stable Outlook, from ‗B+‗/Positive. The government has reined in the fiscal deficit more quickly than expected, and debt dynamics are positive, according to the Fitchratngs.  The economy is growing briskly, while inflation is falling. The current account deficit remains wide, with little adjustment in prospect, but growth in reserves reduces external vulnerability.



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